cc


  



Ashish Verma-1011015
12/1/2011

Note: Conditioning of data is being done before analysis. Gaps or missing data points are estimated by linear
correlation.

O
A REPOR
QUESTION 1: COMPUTE THE DAILY LOG RETU RNS OF THE FOUR EXCHANGE RATES.

Euro

Pound

Dollar

Log-returns

Log-returns
.04

.04

.02

.02

Yen

LOGRETURN_DOLLAR

LOGRETURN_YEN

.03

.05

.02

.04
.03

.01

.02

.00

.00

.00

.01
-.02

-.01

-.02
-.04

.00

-.02

-.01

-.03

-.02

-.04
-.06
01

-.06
01

02

03

04

05

06

07

08

09

10

02

03

04

05

06

07

08

09

10

11

-.03
-.04

11

01

02

03

04

05

06

07

08

09

10

11

-.04
01

02

03

04

05

06

07

08

09

10

11

COMPUTE THE SAMPLE MEAN, VAR IANCE, SKEWNESS, EXCESS KURTOSIS,

AND MINIMUM AND MAXIMUM OF THE FOUR LOG RETURN SERIES AND
COMMENT.

Euro
. 16
.1 
.7798
-.
1
9
.
667
-.66
8
7.819691

Pound
4.7E-

. 7E-

.1 94
-.189

. 94
-.
7 6
8.6
6

Jarque-Bera
Probabili

7 1.8

um

um
q. Dev.
Observaions

Mean
Median
Maximum
Minimum

d. Dev.

ewness
Kurosis

X
X
X

G



Yen

3.39E-05

0.000173

-1.37E-06

4.41E-05

0.010815

0.045163

-0.013057

-0.037612

0.001393

0.006489

0.453996

0.385977

12.28561

8.217757

79
.66

10191.76

3257.364

0.000000

0.000000

.6711
.9 9

.1 4
.161

0.095214

0.487059

0.005448

0.118283

81

81

2810

2810

Returns are negatively skewed for Euro, Pound but positively skewed for dollar and yen
Returns are not normal for all currencies and are leptokurtic or fat-tailed
Conditional expected return are close to zero for all currencies

QUESTION : TEST THE STATIONARITY OF EACH LOG RETU RN SERIES.

|

 
 |
  



 

G






Currenc
Euro
Pound
Dollar
Yen




 

-53.6678

0.0001

-51.2514

0.0001

-
.14 9

0.0001

-52.1018

0.0001

At .
 confidence level, we reject the null hypothesis; log returns of all series do not have a unit root and
are stationary.
Correlogram of log returns
Euro



Gollar

^ 

As seen in the ACF/PCF plot of all series, it does not have very high degree of auto-correlation whereas a nonstationary series has high degree of auto-correlation decreasing slowly with increasing lags. Returns series
does show little serial autocorrelation which is also one of the stylized facts.

QUESTION 4: TEST NORMALITY OF EA CH LOG RETURN SERIES.

Euro

Pound
700

700

Series: LOG_RETURNS
Sample 1/02/2001 11/16/2011
Observations 2810

600

Series: LOG_RETURNS
Sample 1/02/2001 11/16/2011
Observations 2810

600
500

500

Mean
Median
Maxim um
Minim um
Std. Dev.
Skewness
Kurtosis

400
300
200

0.000216
0.000123
0.037798
-0.051593
0.005667
-0.066583
7.819691

400
300
200

0
-0.015

0
-0.050

-0.025

0.000

4.70e-05
2.27e-05
0.012940
-0.018095
0.002394
-0.325726
8.656333

Jarque-Bera 3795.665
Probability
0.000000

100

Jarque-Bera 2721.855
Probability 0.000000

100

Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis

-0.010

-0.005

0.000

0.005

0.010

0.025

Dollar

Yen
700

1,200

Series: LOGRETURN_DOLLAR
Sample 1/02/2001 11/16/2011
Observations 2810

1,000

Series: LOGRETURN_YEN
Sample 1/02/2001 11/16/2011
Observations 2810

600
500

Mean
Median
Maxim um
Minim um
Std. Dev.
Skewness
Kurtosis

800

600

400

200

7.80e-05
-3.15e-06
0.024903
-0.030065
0.003207
0.453996
12.28561

Mean
Median
Maximum
Minimum
Std. Dev.
Skewness
Kurtosis

400
300
200

Jarque-Bera 3257.364
Probability 0.000000

100

Jarque-Bera 10191.76
Probability 0.000000

0
-0.025

0
-0.03

-0.02

-0.01

-0.00

0.01

0.000173
4.41e-05
0.045163
-0.037612
0.006489
0.385977
8.217757

0.000

0.025

0.02

Return series for all currencies are not normal and is leptokurtic (p-value of Jarque-Bera is less than
 for all
series thus the null hypothesis (return series is normal) is rejected)

Q-
: BUILD AN AR MODEL FOR EACH SERIES AND CHECK THE FITTED MODEL.

Oied AR Models
Euro



Pound




0.000215



2.159146

 
0.0309

!"#

!$#

-0.03424

-1.81336

0.0699

!$#

!""#

-0.03958

-2.09751

0.036


 
 

-7.51176





 

0.03686
1.955399
-0.04857

 
0.0506

-2.57808

0.01


 
 

-9.23493

Dollar

!"#
!$#
!%#
!&#

Yen








.6 1
. 67
.891


-.66 4

3.304659
1.767634
4.717954
-3.49361


 
 

Euro

Gollar

 



 


.1 AR(9)
-.1 -1.666
.77
AR(10) .748
9 .98 16

 
 

.

-8.6
86

 

.9
8
.1
-7. 461

Correlogram of Residuals



^ 

Although Residuals showed very little correlation in Fitted AR models in all 4 cases, but the residuals
in all fours were not normal. JB test on residuals showed that residuals did not followed normality
assumption. They were leptokurtic in nature.

QUESTION 6: BUILD AN MA MODEL FOR EACH SERIES AND CHECK THE FITTED MODEL.

Oied MA Models
Euro

Pound










 



0.000216

2.180719

0.0293

'!$#

-0.03527

-1.87115

0.0614

-0.03906

-2.06828

'!""#



 
 








 

MA(1)

0.036145

1.917522

0.0553

MA(2)

-0.04918

-2.60871

0.0091

0.0387


 
 

Dollar
'!"#
'!"(#


Euro

-9.23493

-7.50935

Yen








.69 84
.8417

3.69079
4.458243


 
 

 








-.6 8
.7867

-1.9 6 9
4.1689

MA(9)
MA(1)

-10.3245


 
 

Correlogram of Residuals



 

.
4

-7. 4

Correlogram of Residuals
^ 

Gollar

QUESTION 7: BUILD AN ARMA MODEL FOR EACH SERIES AND CHECK THE FITTED
MOD EL.

Oied ARMA Models

Euro

Pound










 



0.000214

1.998408

0.0458

!"#

-1.0633

-241.783

!$#

-0.98758

-225.352


 
 

'!"#

1.073462

350.7353

0.994895

326.4942

'!$#



 
 








 

AR(1)

-0.44664

-1.94152

0.0523

MA(1)

0.493893

2.206844

0.0274

-7.51275

Dollar

!"#
'!"#

Yen








 

-.46

.
6

-2.0827
2.427948

.74
.1

AR(1)
AR(2)



MA(1)



MA(2)



-9.23439


 
 

-8.64928








 

-1.784
-.9 1

1.799989
.94 66

-

. 818
-. 18

8.
4

 .6

-7. 981


 
 

Euro

Correlogram of Residuals



^ 

Gollar

QUESTION 8: USE THE FITTED MODELS TO COMPUTE 1-DAY AHEAD AND 7 DAY AHEAD FORECASTS STARTING FROM CHOSEN DATE.

Model fied
AR
MA
ARMA

EURO
Equaion

    
   
  

  
    
   

  
   
   


   
   

Euro Oorecass of Log Reurns

Model

Value a 16h Nov,2011

1-da ahead forecas

7-da ahead forecas

AR Oorecas

.1
19
6

.16769

.17998

MA Oorecas

.1
19
6

.8
86

.41974

ARMA Oorecas

.1
19
6

-.4 717

-. 74
8

Model fied
AR
MA
ARMA

POUND
Equaion


   
  

 
    
   

  
   
   

Pound Oorecass of Log Reurns

Model
AR Oorecas
MA Oorecas
ARMA Oorecas

Model fied
AR
MA
ARMA

Value a 16h Nov,2011

.44 9
.44 9
.44 9

1-da ahead forecas

7-da ahead forecas

-8.791 6E-

9.71769E-

-. 97 6

E-9

-1.8 78E-6
4.76

DOLLAR
Equaion


  
   
   
  

 
    
   

 
  
   

Dollar Oorecass of Log Reurns

Model
AR Oorecas
MA Oorecas
ARMA Oorecas

Model fied
AR
MA
ARMA

Value a 16h Nov,2011

1-da ahead forecas

7-da ahead forecas

. 91 187
. 91 187

.1 44

. 7964

-1.7 76
E-

.186
49

. 91 187

1.8
8 1E-

1.84 9 E-7

YEN
Equaion


   
  


   
   


   
  
    
   

Yen Oorecass of Log Reurns

Model
AR Oorecas
MA Oorecas
ARMA Oorecas

Value a 16h Nov,2011

1-da ahead forecas

7-da ahead forecas

. 96847

-.194E-

.1
9
9

. 96847
. 96847

-.1461E-

7.
9E-

.16 
4. 8 9E-

QUESTION 9: IS THERE EVIDENCE OF ARCH EFFECTS IN THE LOG RETU RN SERIES? U SE

BOX-LJUNG AND OTHER TESTS TO ANSWER THE QUESTION.

Euro

Gollar

X
X

Correlogram of Squared Residuals (ARMA)



^ 

In all four log return series of exchange rates there is significant auto correlation in the squared return
series
P-value of Box-Ljung statistics in all four cases is zero (<
 confidence Interval level), there null
hypothesis is rejected, implying significant auto-correlation in squared residuals. (Null Hypothesis in
Box-Ljung is 




hus arch-effec exiss in log-reurns of all four series

QUESTION 1: USE THE ACF/PACF OF THE SQUARED LOG RETURNS TO IDENTIFY AN

ARCH MODEL FOR EACH SERIES. TEST FOR ARCH EFFECTS. WHAT ARE THE FITTED
MOD ELS?

Oied ARCH Models

Euro : Ar(11)-Arch(4)

Pound : Ar(0)-Arch(8)







)


 



0.000242

1.998408

0.0458

!""#


-0.039388

-241.783

RESID(1)^2
M
 






)


 

2.29E-06

18.56635

M
 

0.07915
4.471953

RESID(2)^2

0.07534

6.209688



2.08E-05

28.46481

RESID(3)^2

0.069738

10.31774


G!"#*$

0.151156

8.348903

RESID(4)^2

0.068818

4.987416


G!$#*$

0.080704

5.096814

RESID(5)^2

0.165215

7.321421


G!%#*$

0.02391

1.794203

0.0728

RESID(6)^2

0.034923

2.203753

0.0275


G!&#*$

0.069687

3.914755

0.0001

RESID(7)^2

0.072234

4.711605

RESID(8)^2

0.028443

2.038036

0.0415





 
 

-7.59811


 
 

Dollar: Arma(1,1)-Arch(6)

-9.38981

Yen: AR(10)-Arch(6)





)


 

!"#

-.6 144

-4.28945

'!"#

.66
6

4.765568





)


 

AR(9)

-0.02876

-2.033008

0.0421

AR(10)

0.06106

4.290906

M
 


M
 




6.
7E-7

31.33969

2.53E-06

20.23423


G!"#*$

(&"&+%%

",++"(-

RESID(1)^2

0.285686

14.57719


G!$#*$

. 8



11.69246

RESID(2)^2

0.062073

4.023763

0.0001


G!%#*$

.87

4.626349

RESID(3)^2

0.046324

3.244222

0.0012


G!&#*$

.14691

8.380267

RESID(4)^2

0.073219

4.094673


G!+#*$

. 8166

11.05533

RESID(5)^2

0.227713

9.200789


G!.#*$

.1

6

9.439572

RESID(6)^2

0.026184

2.387226

0.017


 
 

-9.6


 
 

-9.16182

Euro

Gollar

X
X

Correlogram of Squared Residuals



^ 

After fitting the appropriate arch model in all four series, auto-correlation in squared residuals were
significantly reduced
e also observed he auo-correlaion in residuals in arch as well as garch model fiing, i was ver
low. e have no repored he ACO/PACO graphs of residuals (due o fixed page limi of 15) afer
fiing arch and garch models, bu we checed ha residuals have low auo-correlaions afer fiing
hese models

11. BUILD A GARCH MODEL WITH GAUSSIAN INNOVATIONS FOR THE LOG RETURNS OF
EACH SERIES.

Oied Models






 

0.000196

AR(11)

-0.040662



3.30E-07


G!
"#*$
!
"#

 

8.98E-05

)


2.18153

Coefficient

0.0291

!"#

0.319475

0.02016

-2.0163

0.0438

'!"#

0.346465

7.53E-08

4.38998



3.82E-08

0.042265

0.004697

8.99829

0.947256

0.00598

158.263


G!
"#*$
!
"#

z-Statistic

Prob.

-2.02067

0.043

2.20269

0.027

8.64E-09

4.41732

0.035697

0.004125

8.65298

0.956934

0.004949

193.349

/

0  

AR(10)

1|

 

0.044545

0.018031

0.15729

Variance equaion


 
 




POUND
Std.
Error
0.1581

)


2.470479

-7..&&


 
 

 
0.0135

Coefficient
!"#

-0.674

'!"#

0.71067

/

0  

DOLLAR
Std.
Error
0.21094
0.0.1989

-9.&&

z-Statistic

Prob.

-3.19545

0.0014

3.57121

0.0004

Variance equaion



3.74E-07

7.67E-08

4.872609



4.01E-08

3.18E-09

12.6303


G!
"#*$
!
"#

0.06553

0.0049867

13.14309

0.17066

0.011241

15.182

0.926037

0.005787

160.0214


G!
"#*$
!
"#
!
$#

0.355055

0.074781

4.74794

.67

7.23862

Akaike info criterion

.4899

,+$.

Akaike info criterion

2&%"

Correlogram of squared residuals

EURO






^EN


1 . COMPARE THE FITTED ARCH AND GARCH MODELS. IS THERE ANY SIGNIFICANT
DIFFERENCE?
Arch and Garch models are the same as mentioned in previous questions

Series

Model
Arch
Euro Garch
Arch
Pound Garch
Arch
Dollar Garch
Arch
Yen Garch
X
X

Skewnes Kurtosis
s of
of
J-B
Innovations LL
AIC
SIC
DW
Residuals Residuals statistics
Normal
164.
6 -7.
98114 -7.
8 7 .
8 .671 4.666 14.4817
Normal
17.9 -7.6448 -7.64 . 7 1.84 4. 64474 189.614
Normal
1 1.68 -9.8987 -9.778 1.9 9898 -. 4
.974
8
1
.9
Normal
1 64.7 -9.444 -9.4 98
1.98116 .781 4.8 4 6.174
Normal
11 1.9 -9.649 -9.17 1.9697 .
976 9.79 4

6. 7
Normal
1 4.
-9.4 69 -9.417 1.974
.6 6 9.8768
716.91
12835.55
-9.161822 -9.14274 1.957627 0.230323 4.935999 462.0336
Normal
12875.89
-9.19E+00 -9.18573 1.95892 0.20676 4.885251 434.603
Normal

Garch models across all log-return series have lower AIC, thus information loss is less, hence more
accurate. Same is observed from SIC.
Residuals have lower kurtosis in most cases, implying a closer resemblance to normal distribution

1. BUILD A BI-VARIATE AUTOREGRESSIVE MOD EL FOR LOG RETURNS OF THE US

DOLLAR AND UNITED KINGDOM POUND EXCHANGE RATES VERSUS INDIAN RUPEES.
DISCUSS THE IMPLICATIONS OF THE FITTED MODEL.

LOGRETURNPOUNG

LOGRETPOUNG(-1)



 

0.039956


 
(0.01999)

LOGRETPOUNG(-2)

-0.05259

(0.02003)

LOGRETPOUNG(-5)

-0.051952

(0.01993)

LOGRETPOUNG(10)
LOGRETPOUNG(11)
LOGRETPOUNG(12)
LOGRETGOLLAR(1)
LOGRETGOLLAR(2)
LOGRETGOLLAR(5)
LOGRETGOLLAR(10)
LOGRETGOLLAR(11)
LOGRETGOLLAR(12)
C

0.000507

(0.01998)

-0.006593

(0.02008)

-0.061694

(0.02004)

-0.033395

(0.03467)

0.009534

(0.03454)

0.106105

(0.03428)

0.035805

(0.03459)

0.025186

(0.03472)

-0.021052

(0.03459)

5.12E-05

(4.5E-05)

AIC

LOGRETURN GOLLAR

[
1.99888]
[2.62553]
[2.60714]
[
0.02536]
[0.32835]
[3.07858]
[0.96318]
[
0.27603]
[
3.09484]
[
1.03499]
[
0.72535]
[0.60867]
[
1.13445]



 

-0.053131


 
(0.01152)

-0.014392

(0.01154)

-0.022768

(0.01148)

0.031639

(0.01151)

0.013039

(0.01157)

-0.052003

(0.01155)

0.089575

(0.01998)

-0.016539

(0.01990)

0.030321

(0.01976)

0.070934

(0.01993)

-0.081744

(0.02001)

0.042007

(0.01993)

3.50E-05

(2.6E-05)

-9.23604


[4.61259]
[1.24687]
[1.98280]
[
2.74843]
[
1.12697]
[4.50329]
[
4.48342]
[0.83094]
[
1.53474]
[
3.55836]
[4.08543]
[
2.10767]
[
1.34565]

-10.3385

Autocorrelations with 2 Std.Err. Bounds

Cor(LOGRETPOUND,LOGRETPOUND(-i))

Cor(LOGRETPOUND,LOGRETDOLLAR(-i))

.04

.04

.02

.02

.00

.00

-.02

-.02

-.04

-.04
2

10

12

Cor(LOGRETDOLLAR,LOGRETPOUND(-i))

10

12

Cor(LOGRETDOLLAR,LOGRETDOLLAR(-i))

.04

.04

.02

.02

.00

.00

-.02

-.02

-.04

-.04
2

10

12

10

12

Pormaneau es
VAR Residual Portmanteau Tests for Autocorrelations
Null Hypothesis: no residual autocorrelations up to lag h
Date: 11/22/11

Time: 04:02

Sample: 1/02/2001 11/16/2011

Included observations: 2798

Lags

Q-Stat

Prob.

Adj Q-Stat

Prob.

df

0.036518

NA*

0.036531

NA*

NA*

0.144591

NA*

0.144682

NA*

NA*

6.437866

NA*

6.444711

NA*

NA*

11.43298

NA*

11.44697

NA*

NA*

11.47483

NA*

11.48890

NA*

NA*

12.34550

NA*

12.36144

NA*

NA*

14.94332

NA*

14.96578

NA*

NA*

18.10792

NA*

18.13945

NA*

NA*

23.95559

NA*

24.00599

NA*

NA*

10

24.07214

NA*

24.12296

NA*

NA*

11

24.10335

NA*

24.15429

NA*

NA*

12

24.21589

NA*

24.26732

NA*

NA*

13

26.61878

0.0000

26.68142

0.0000

14

46.56651

0.0000

46.72947

0.0000

15

58.19974

0.0000

58.42540

0.0000

12

16

61.44892

0.0000

61.69326

0.0000

16

17

64.63741

0.0000

64.90125

0.0000

20

18

74.83857

0.0000

75.16846

0.0000

24

19

77.52704

0.0000

77.87531

0.0000

28

20

95.79013

0.0000

96.26989

0.0000

32

MAR Lag Exclusion Wald Tests

Chi-squared test statistics for lag exclusion:
Numbers in [ ] are p-values
Lag 1
Lag 2
Lag 5
Lag 10
Lag 11
Lag 12
df
X

LOGRETPOUND

LOGRETDOLLAR

Joint

4.101093

31.15588

46.74749

[ 0.128665]

[ 1.72e-07]

[ 1.72e-09]

7.274628

3.274298

8.832711

[ 0.026323]

[ 0.194534]

[ 0.065420]

12.48438

4.832243

13.97314

[ 0.001946]

[ 0.089267]

[ 0.007381]

1.218455

29.75408

30.77929

[ 0.543771]

[ 3.46e-07]

[ 3.40e-06]

0.535662

16.73656

21.40527

[ 0.765037]

[ 0.000232]

[ 0.000263]

12.31871

20.7693

27.7941

[ 0.002114]

[ 3.09e-05]

[ 1.37e-05]

Used Var lag exclusion test to remove lag-variables which are insignificant

14. BUILD A FOUR-VARIATE AUTOREGRESSIVE MODEL FOR LOG RETURNS OF THE US

DOLLAR, JAPANESE YEN, EURO AND UNITED KINGDOM POUND EXCHANGE RATES
VERSUS INDIAN RUPEES. DISCUSS THE IMPLICATIONS OF THE FITTED MODEL.



 



Coefficien

|G
!"#

|G
!+#

|G
!-#

|G
!2#

|G
!"(#

|G
!""#

|G
!"$#

||
G!"#

||
G!+#

||
G!-#

||
G!2#

||
G!"(#

||
G!""#

||
G!"$#

|1|!
"#

|1|!
+#

|1|!
-#

|1|!
2#

|1|!
"(#

|1|!
""#

|1|!
"$#

|!
"#

|!
+#

|!
-#

|!
2#

|!
"(#

|!
""#

|!
"$#


sd error


 

-sa

Coefficien sd error



-sa

logreurn_euro


 


Coefficien sd error

-sa

Coefficien sd error

-sa

0.109927

(0.02306)

[ 4.76728]

0.034197

(0.04020)

[ 0.85059]

0.055957

(0.04700)

[ 1.19044]

0.082576

(0.04147)

[ 1.99144]

0.035491

(0.02293)

[ 1.54757]

0.072476

(0.03999)

[ 1.81257]

0.027132

(0.04675)

[ 0.58038]

0.013980

(0.04124)

[ 0.33899]

0.043804

(0.02329)

[ 1.88092]

-0.02744

(0.04061)

[-0.67577]

0.126580

(0.04747)

[ 2.66628]

0.002826

(0.04188)

[ 0.06748]

-0.007847

(0.02340)

[-0.33529]

-0.044218

(0.04081)

[-1.08362]

-0.091701

(0.04771)

[-1.92209]

0.001724

(0.04209)

[ 0.04097]

0.072452

(0.02339)

[ 3.09697]

0.030910

(0.04079)

[ 0.75781]

0.138336

(0.04769)

[ 2.90073]

0.051406

(0.04207)

[ 1.22193]

-0.066565

(0.02340)

[-2.84416]

0.055850

(0.04081)

[ 1.36867]

-0.060307

(0.04771)

[-1.26405]

-0.007522

(0.04209)

[-0.17872]

0.013795

(0.02312)

[ 0.59663]

-0.040468

(0.04031)

[-1.00388]

0.023112

(0.04713)

[ 0.49037]

0.057909

(0.04158)

[ 1.39279]

-0.004898

(0.01477)

[-0.33164]

0.068462

(0.02575)

[ 2.65873]

-0.077996

(0.03011)

[-2.59069]

-0.001033

(0.02656)

[-0.03889]

0.003801

(0.01473)

[ 0.25806]

-0.055262

(0.02568)

[-2.15160]

-0.001833

(0.03003)

[-0.06103]

-0.079344

(0.02649)

[-2.99524]

0.017113

(0.01477)

[ 1.15876]

-0.007791

(0.02575)

[-0.30255]

-0.036771

(0.03011)

[-1.22138]

0.016465

(0.02656)

[ 0.61997]

0.010669

(0.01482)

[ 0.71975]

-0.053632

(0.02584)

[-2.07523]

-0.022205

(0.03022)

[-0.73489]

-0.007155

(0.02666)

[-0.26842]

0.043147

(0.01485)

[ 2.90564]

-0.009273

(0.02589)

[-0.35815]

0.078281

(0.03027)

[ 2.58604]

-0.052145

(0.02670)

[-1.95275]

0.011954

(0.01485)

[ 0.80495]

0.016971

(0.02589)

[ 0.65546]

0.012894

(0.03027)

[ 0.42594]

0.032794

(0.02670)

[ 1.22801]

-0.053129

(0.01476)

[-3.60067]

-0.088369

(0.02573)

[-3.43498]

-0.086688

(0.03008)

[-2.88206]

-0.076244

(0.02653)

[-2.87345]

-0.004062

(0.01147)

[-0.35422]

-0.042992

(0.02000)

[-2.15003]

0.018459

(0.02338)

[ 0.78956]

-0.00845

(0.02062)

[-0.40970]

-0.004786

(0.01138)

[-0.42071]

0.031476

(0.01983)

[ 1.58699]

-0.006253

(0.02319)

[-0.26966]

0.017430

(0.02046)

[ 0.85205]

-0.025795

(0.01144)

[-2.25534]

-0.017694

(0.01994)

[-0.88733]

-0.052927

(0.02331)

[-2.27009]

-0.01234

(0.02057)

[-0.60000]

-0.021922

(0.01145)

[-1.91404]

-0.004024

(0.01997)

[-0.20149]

-0.009786

(0.02335)

[-0.41913]

-0.005142

(0.02060)

[-0.24967]

0.004804

(0.01141)

[ 0.42115]

-0.000833

(0.01989)

[-0.04189]

0.020281

(0.02325)

[ 0.87223]

0.016761

(0.02051)

[ 0.81715]

-0.008505

(0.01139)

[-0.74639]

-0.014177

(0.01987)

[-0.71362]

-0.014772

(0.02323)

[-0.63598]

-0.005456

(0.02049)

[-0.26627]

0.021765

(0.01137)

[ 1.91370]

0.011380

(0.01983)

[ 0.57387]

0.021788

(0.02318)

[ 0.93979]

-0.024328

(0.02045)

[-1.18950]

-0.074863

(0.01467)

[-5.10210]

-0.046368

(0.02558)

[-1.81246]

0.034628

(0.02991)

[ 1.15769]

-0.019602

(0.02639)

[-0.74289]

-0.031945

(0.01464)

[-2.18212]

0.000710

(0.02552)

[ 0.02781]

-0.0494

(0.02984)

[-1.65537]

0.011491

(0.02633)

[ 0.43651]

-0.018819

(0.01463)

[-1.28642]

0.062892

(0.02551)

[ 2.46574]

0.012037

(0.02982)

[ 0.40363]

0.001941

(0.02631)

[ 0.07379]

0.009322

(0.01478)

[ 0.63089]

0.039625

(0.02576)

[ 1.53801]

0.022662

(0.03012)

[ 0.75232]

0.005211

(0.02657)

[ 0.19611]

-0.021707

(0.01476)

[-1.47073]

0.011405

(0.02573)

[ 0.44322]

-0.002838

(0.03009)

[-0.09432]

0.035363

(0.02654)

[ 1.33240]

0.000273

(0.01475)

[ 0.01852]

-0.032293

(0.02572)

[-1.25531]

0.010556

(0.03008)

[ 0.35096]

-0.056295

(0.02653)

[-2.12175]

-0.00183

(0.01483)

[-0.12337]

0.037474

(0.02586)

[ 1.44897]

0.031285

(0.03024)

[ 1.03462]

0.056858

(0.02667)

[ 2.13154]

9.87E-05

(6.0E-05)

[ 1.65278]

0.000110

(0.00010)

[ 1.05693]

0.000181

(0.00012)

[ 1.48417]

0.000213

(0.00011)

[ 1.98475]

/3
|


I have used VAR exclusion test to remove insignificant lag variables from the estimated model. As seen from
the above test, all lag variables in the estimated model are significant at 8% level.
Autocorrelations w ith 2 Std.Err. Bounds

Cor(LOGRETDOLLAR,LOGRETDOLLAR(-i))

Cor(LOGRETDOLLAR,LOGRETPOUND(-i))

Cor(LOGRETDOLLAR,LOGRETEURO(-i))

Cor(LOGRETDOLLAR,LOGRETYEN(-i))

.06

.06

.06

.06

.04

.04

.04

.04

.02

.02

.02

.02

.00

.00

.00

.00

-.02

-.02

-.02

-.02

-.04

-.04

-.04

-.04

-.06

-.06

-.06

10

12

Cor(LOGRETPOUND,LOGRETDOLLAR(-i))

10

12

Cor(LOGRETPOUND,LOGRETPOUND(-i))

-.06
2

10

12

Cor(LOGRETPOUND,LOGRETEURO(-i))

.06

.06

.06

.06

.04

.04

.04

.04

.02

.02

.02

.02

.00

.00

.00

.00

-.02

-.02

-.02

-.02

-.04

-.04

-.04

-.04

-.06

-.06

-.06

10

12

Cor(LOGRETEURO,LOGRETDOLLAR(-i))

10

Cor(LOGRETEURO,LOGRETPOUND(-i))

10

12

Cor(LOGRETEURO,LOGRETEURO(-i))

.06

.06

.06

.04

.04

.04

.04

.02

.02

.02

.02

.00

.00

.00

.00

-.02

-.02

-.02

-.02

-.04

-.06

-.04

-.06
2

10

12

Cor(LOGRETYEN,LOGRETDOLLAR(-i))

10

12

10

12

Cor(LOGRETYEN,LOGRETEURO(-i))

.06

.06

.06

.04

.04

.04

.04

.02

.02

.02

.02

.00

.00

.00

.00

-.02

-.02

-.02

-.02

-.04

-.04

-.04

-.04

-.06

-.06

-.06

10

12

10

12

10

12

10

12

Cor(LOGRETYEN,LOGRETYEN(-i))

.06

12

-.06
2

Cor(LOGRETYEN,LOGRETPOUND(-i))

10

-.04

-.06
2

Cor(LOGRETEURO,LOGRETYEN(-i))

.06

-.04

-.06
2

12

Cor(LOGRETPOUND,LOGRETYEN(-i))

-.06
2

10

12

10

12

15. ARE HE O
ERIE
OO HE U
DOLLAR AND UNI ED KINGDOM POUND

EX CHANGE RA E
VER
U
INDIA N RUPEE
COIN EGRA ED ? DI
CU


HE
IMPLICA ION
.

ep 1 : esing of Uni roos in Dollar and Pound
eries (ADO es)
Null Hypothesis

Gollar has a unit root




-1.196010
0.6784
Fail to reject null hypothesis as C.I. of 5%

AG
Result

Pound has a unit root




-2.325427
0.1640
Fail to reject null hypothesis as C.I. of 5%

Thus both dollar and pound series have a unit root and are non-stationary

ep 2: Regression of dollar over pound

Regression Result


 

 

 

 

59.93926

0.5854

102.3903

POUNG

-0.18573

0.007578

-24.50905

Adjusted R-squared

0.175879

Stats
R-squared

0.176172

Gurbin-Watson stat

0.008547

D-W is close to zero there we accept or fail to reject the null hypothesis of No Co-integration. Thus
no co-integration exist between dollar and pound series

ep 3 : CRADO es (ADO es of residuals from regression)

Null Hypothesis: RESIG01 has a unit root

 


 


 



!

c"
#$%&

t-Statistic

Augmented
Gickey- -1.792
uller test statistic

Prob.*

0.3849

Thus we accept or fail to reject the null hypothesis implying that residuals have a unit root. Therefore
residuals from regression of dollar and pound are not stationary implying    
 
4


 



16. BUILD A BI-VARIATE AUTOREGRESSIVE MODEL WITH EQUILIBRIUM CORRECTION

FOR THE TWO SERIES (US DOLLAR AND UNITED KINGDOM POUND EXCHANGE RATES
VERSUS INDIAN RUPEES) TAKEN TOGETHER.
X

 

     
  
5

 
 

  
   

6    
0 
 
 
 
4. Only if the variables are co-integrated, the residuals from the equilibrium regression
can be used to estimate the error correction model. In absence of co-integration VAR with equilibrium
correction is same as a normal VAR

17. ARE THE FOU R SERIES OF THE US DOLLAR, JAPANESE YEN, EURO AND UNITED
KINGDOM POUND EXCHANGE RATES VERSUS INDIAN RUPEES COINTEGRATED ? DISCUSS
THE IMPLICATIONS.

ohansen Co-integration Test

Unrestricted Cointegration Rank Test (Trace)
Hypothesized

Trace

0.05

No. of CE(s)

Eigenvalue

Statistic

Critical Value

Prob.**

None

0.002564

17.5322

47.85613

0.9983

At most 1

0.002329

10.32968

29.79707

0.975

At most 2

0.001348

3.786496

15.49471

0.92

At most 3

1.49E-07

0.000417

3.841466

0.9856

Trace test indicates no cointegration at the 0.05 level

X

As seen from he johansen co-inegraion es, here is no co-inegraion beween dollar, pound,
euro and en series a 0.05% level.

18. BUILD A OOUR-VARIA E AU OREGRE

IVE MODEL I H EQUILIBRIUM CORREC ION

OOR ALL HE OOUR
ERIE
(U
DOLLAR , JAPANE
E YEN, EURO AND UNI ED KINGDOM
POUND EXCHANGE RA E
VER
U
INDIA N RUPEE
) AKEN OGE HER.

In absence of co-inegraion ECM i.e. error correcion model is no informaive, he model is same
as a normal var. Thus in absence of co-integration among the dollar, yen, euro and pound series,
building a four-variate auto-regression model with equilibrium correction will be useless and hence I
have not build a four-variate autoregressive model with equilibrium correction (Note: VAR with error
correction can be easily built using VEC option in eviews while estimating VAR, but in this case ECM is
useless).